Pure Cycle Corporation — Q3 FY2019 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2019; the quarter is the company’s fiscal third quarter. The interim financial statements are unaudited. Pure Cycle develops wholesale water and wastewater services and the Sky Ranch master-planned community near Denver.
Financial performance and position
| Metric | Three months ended May 31, 2019 | Nine months ended May 31, 2019 |
|---|---|---|
| Revenue | $5.18 million, versus $1.21 million | $10.89 million, versus $3.07 million |
| Gross profit | $1.92 million, versus $0.62 million | $3.54 million, versus $1.70 million |
| Operating income (loss) | $1.16 million, versus $(0.09) million | $1.40 million, versus $(0.30) million |
| Net income | $1.26 million, versus $0.05 million | $1.80 million, versus $0.06 million |
| Net income per diluted share | $0.05 | $0.07 |
| Operating cash flow | Not presented by quarter | $(2.74) million, versus $(1.36) million |
Revenue and margins: The increase in revenue primarily reflects Sky Ranch lot development revenue ($2.71 million for the quarter; $6.04 million year to date) and water and wastewater tap fees. Water usage revenue was $1.40 million for the quarter and $2.92 million year to date. Management reported water-delivery gross margins of 71% for the quarter and 67% year to date, compared with 64% and 69%, respectively, in the prior-year periods. Sky Ranch lot-sale gross margins were 4% for the quarter and 5% year to date.
Liquidity and assets: At May 31, 2019, cash and cash equivalents were $3.58 million and short-term investments were $6.19 million. Working capital was $20.8 million, including $9.8 million of cash and short-term investments. Total assets were $76.84 million; total liabilities were $5.27 million. Inventory rose to $12.69 million from $5.20 million at August 31, 2018, largely reflecting Sky Ranch development activity. The balance sheet shows no conventional borrowings; it includes a $333,000 recorded participating-interest obligation related to Export Water.
Cash flow: Nine-month investing cash outflow was $5.35 million, including $7.70 million invested in water, water systems and land; financing provided $0.11 million. Cash and cash equivalents declined by $7.98 million from fiscal year-end. Operating cash use reflected, among other items, $5.31 million invested in inventory, partly offset by customer collections and deferred lot-sale receipts.
Material changes and management commentary
- Compared with the prior-year periods, revenue and earnings increased substantially as the company began recognizing Sky Ranch lot sales and recognized more tap-fee revenue. No land-development revenue was reported in the comparable 2018 periods.
- Water deliveries fell 9% for the quarter and 8% year to date, which management attributed primarily to lower oil-and-gas demand. Despite lower volume, water usage revenue increased 20% for the quarter and 1% year to date, reflecting higher rates and customer mix.
- Management said working capital was sufficient to fund operations for the next 12 months. It intends to phase construction and lot deliveries to align investment with builder payments.
- The company had $27.50 million of open contracts, primarily for 506 Sky Ranch lots, and expected to recognize approximately 54% of that contracted revenue over the following 12 months.
- Management estimated first-phase Sky Ranch development capital of approximately $35 million, including about $27 million expected to be reimbursable by the Community Authority Board (CAB); contracted lot sales were estimated to generate approximately $36 million. Reimbursement depends on the CAB or Sky Ranch districts issuing bonds. A CAB bond offering was being explored, potentially by calendar year-end 2019, subject to market and other conditions.
Risks, contingencies and unusual items
- Oil-and-gas activity is important to water sales: fracking represented 93% of water and wastewater revenue for the quarter, and one oil-and-gas customer accounted for approximately 93% of that segment’s revenue. Colorado SB 19-181 expands local regulatory authority over oil-and-gas development; resulting delays or reduced drilling could affect water sales and, more broadly, local housing demand.
- Sky Ranch reimbursement depends on future municipal bond issuance. At May 31, 2019, advances to the CAB plus accrued interest totaled $13.7 million and were included in inventory or land-development costs; timing and recovery are uncertain.
- The CAA includes an approximately $657,000 contingent portion not recorded as a balance-sheet liability, because payment depends on Export Water sales. The remaining potential third-party obligation, including the recorded portion, was approximately $990,000.
- The company reported no contingencies with a reasonably possible material loss as of May 31, 2019. Management identified no formal financial guidance in the filing. Future results remain exposed to water demand, oil-and-gas activity and prices, development and homebuilder activity, construction costs, permitting, and bond-market conditions.
Important facts for investors to verify
- Whether Sky Ranch lot deliveries, builder payments, and the expected CAB bond financing proceed on schedule—and whether reimbursable costs are recovered.
- How dependent water revenue remains on a small number of oil-and-gas customers, and the effects of SB 19-181 and drilling activity on volumes and margins.
- Whether operating cash use and the decline in cash are consistent with the company’s phased development plan and stated 12-month liquidity assessment.
- How much of the $27.50 million contracted lot revenue is recognized and collected, and how actual lot-development costs compare with management’s estimates.
- The timing and accounting for the Export Water participating interests and the contingent obligation, as well as the collectability and timing of related-party and CAB amounts.